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Wednesday, December 2, 2015

Dropping Price of Oil Means it is Catching Up to Other Commodities

From CNBC:

When oil prices started taking off in 2004, it was part of the same "commodity supercycle" that sent prices of so many other commodities spiraling up. Oil stayed at the party longer than anyone else but now, the party is over.

The driving force was the surge in economic growth from the emerging markets — especially China. Between 2003 and 2013, China alone accounted for 45 percent of total growth in oil demand. It was a similar story for other commodities.

But the party ended earlier for other commodities as investment to expand production capacity coincided with a tempering of demand growth. Overcapacity and surplus, as opposed to shortage, became the dominating motif, as is so evident in the current travails of mining companies.

Prices for non-energy commodities had already begun to decline in the spring of 2011, according to the IHS Materials Price Index. More recently, that decline has turned into a rout, with prices down 50 percent just since July 2014, carrying them back down to about where they were in the depth of the 2008 financial panic.

Oil, however, had been the holdout, remaining at around $100 a barrel — and, in fact, reaching $115 in June 2014 when ISIS seemed to be rolling toward the gates of Baghdad. It was only in September 2014 that the weakening of oil prices became apparent. The decline turned into a collapse in November 2014, when OPEC made the historic decision not to cut output but, instead, let the market find its own price.